It is happening across the markets and exchanges worldwide: machines have been quietly easing out humans from modern stock markets. This can be realised by looking at the volume accounted by these Algo systems with betterment of technology and several startups and fintechs building excellent and customizable algo platforms.
In simple terms, algorithmic trading involves the use of technology to buy or sell securities.
Normally, humans carry out this analysis themselves. They analyse companies, sectors, businesses, prices and other data, and decide when to buy or sell.
But this data can be automatically analysed by a computer as well, and if you program an algorithm to suit your needs, you could have the computer perform tasks better than you, and more importantly, quicker than you and without emotional bias.
Tech-savvy brokers provide APIs to simplify the task even more by extending an integration with their trading platform with which you can build your own customized Algo trading applications.
Access to enterprise grade trading APIs enable traders to place orders based on a pre-defined logic easily. So, even as these kinds of developments are helping traders/investors better deploy their trading strategies, it is nascent. However, in the era of computer assisted trading, a contactless trading environment is the way ahead.
Having said that, with trading APIs, fintechs can build their own innovative trading platforms above the stock broker's infrastructure instead of becoming stock brokers themselves. This helps to save immense costs, time and helps in specializing in their area of expertise.
It allows tech-friendly new breed of traders/investors while they improve upon their core competency, while brokers can deal with operational and regulatory requirements as is required by the exchanges and regulator. This certainly facilitates users in service aspects with better delivery and time saving as well.
Implementing the algorithm using a computer program is the final component of algorithmic trading, accompanied by back testing it on historical periods of past stock-market performance to see if using it would have been profitable so you can run your algos N number times or modify it to achieve desired results.
One can also run the strategies live in paper trading mode to analyse their algos using objective performance metrics. Algo trading platforms help market participants to build these strategies or offer them a strategy basket to choose from, especially if they are new users and hand holding is required then accordingly guidance can be provided.
As traders' needs are becoming more evolved and particular, there is a need to help make the experience easier to encourage more youngsters to trade. Algo trading offers several options to users to choose from the marketplace as per their requirements and deploy them in their trading account comfortably without any hassles of coding, data management, API management, position management etc., providing ease to traders/investors.
However, builders and users of Algo trading platforms have to bear a fixed cost which may not translate to profits if cost is not kept at a bare minimum. The collaborative efforts among tech-savvy brokerages, new fintechs and algo service providers are helping shape the ecosystem to cope with the fast paced generation of traders. It is the synergy between these partners that help simplify the experience without having to code anything and also bring down the cost to a large extent.
Additionally, Algo enabled features like trade notifications via SMS/WhatsApp/Email/Phone call allows one to strategize their trade with little to no intervention and helps avoid accidents. You can set an inbuilt risk management, position sizing and profit taking rules that can eradicate unnecessary manual intervention wherever possible.
For those of you who do not have the time or patience to track markets all day and make multiple trading decisions, Algo trading can solve the problem in line with feedback and demand from the new breed of traders and investors. There are additional risks and challenges such as system failure risks, network connectivity errors, time-lags between trade orders and execution and, most important of all, imperfect algorithms.
The more complex an algorithm, the more stringent back testing or forward testing is needed before it is put into action and many such developments can be seen in this space taking into account the new normal.
Finally, all of this cannot be achieved without the buy in from the regulator. The good news is that the Securities and Exchange Board of India (Sebi) recently announced a regulatory sandbox framework to allow fintechs and technology-focused capital market entities to test their products, services and business models in a live environment with real customers that are eligible with necessary safeguards in place.
So, the stage is set. The road is clear, and there is willingness to adapt to the emerging preferences of the tech-savvy generation of traders.
(The author is Co-founder & CEO at FYERS.)Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.